4996 Federal Register / Vol. 71, No. 20 / Tuesday, January 31, 2006 / Rules and Regulations 

(6) If the State fails to comply with the 

requirements of paragraphs (a)(3), (4), or 

(5) of this section, then the FHWA shall 

revise the obligations or take such other 

action as authorized by 23 CFR 1.36. 

The FHWA shall advise the State of its 

proposed actions and provide the State 

with the opportunity to respond before 

actions are taken. The FHWA shall not 

adjust obligations without a State’s 

consent during the August 

redistribution process, August 1 to 

September 30. 

* * * * * 

[FR Doc. 06–863 Filed 1–30–06; 8:45 am] 

BILLING CODE 4910–22–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9248] 

RIN 1545–BC86 

Residence Rules Involving U.S. 

Possessions 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations, temporary 

regulations, and removal of temporary 

regulations. 

SUMMARY: This document contains final 

regulations that provide rules for 

determining bona fide residency in the 

following U.S. possessions: American 

Samoa, Guam, the Northern Mariana 

Islands, Puerto Rico, and the United 

States Virgin Islands under sections 

937(a) and 881(b) of the Internal 

Revenue Code (Code). 

DATES: Effective Date: These regulations 

are effective January 31, 2006. 

Applicability Dates: For dates of 

applicability, see §§ 1.881–5(f)(8) and 

1.937–1(i). 

FOR FURTHER INFORMATION CONTACT: J. 

David Varley, (202) 435–5262 (not a tollfree number). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collections of information 

contained in these final regulations have 

been reviewed and approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)) under control number 1545–

1930. 

The collections of information in 

these final regulations are in § 1.937–1. 

The collection of information required 

by § 1.937–1(h) is to ensure that 

individuals claiming to become, or 

cease to be, residents of a U.S. 

possession file notice of such a claim 

with the Internal Revenue Service in 

accordance with section 937(c) of the 

Code. Individuals subject to this 

reporting requirement must retain 

information to establish their residency 

as required by section 937(c) of the Code 

and § 1.937–1. An additional collection 

of information in these final regulations 

is in § 1.937–1(c)(4)(iii). This 

information is required to satisfy the 

documentation and production 

requirements for individuals who come 

within an exception to the presence test 

of § 1.937–1(c) as a consequence of 

receiving (or accompanying certain 

family members who receive) qualifying 

medical treatment. 

The collections of information are 

mandatory and will be used for audit 

and examination purposes. The likely 

respondents are individuals who 

become (or cease to be) bona fide 

residents of a U.S. possession and 

individuals who, in satisfying the 

presence test requirement for bona fide 

residence in a possession, exclude days 

in the U.S. or include days in a relevant 

possession because they receive (or 

accompany certain family members who 

receive) qualifying medical treatment. 

Estimated total annual reporting and/ 

or recordkeeping burden: 300,000 hours. 

Estimated average annual burden 

hours per respondent: 4 hours. 

Estimated number of respondents: 

75,000. 

Estimated annual frequency of 

responses: annually. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Comments concerning the accuracy of 

this burden estimate and suggestions for 

reducing this burden should be directed 

to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. 

Books or records relating to a 

collection of information must be 

retained as long as their contents might 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

The American Jobs Creation Act of 

2004 (Pub. L. 108–357) was enacted on 

October 22, 2004. Section 809 of the Act 

added section 937 to the Code, relating 

to residence, source, and effectively 

connected income with respect to the 

U.S. possessions. On April 11, 2005, the 

IRS and Treasury published in the 

Federal Register temporary regulations 

(TD 9194, 70 FR 18920, as corrected at 

70 FR 32589–01), which provided rules 

to implement section 937 and to 

conform existing regulations to other 

legislative changes with respect to U.S. 

possessions. A notice of proposed 

rulemaking (REG–159243–03, 70 FR 

18949) cross-referencing the temporary 

regulations was published in the 

Federal Register on the same day. 

Written comments were received in 

response to the notice of proposed 

rulemaking and a public hearing on the 

proposed regulations was held on July 

21, 2005. The proposed regulations 

relating to the residence rules 

(specifically, §§ 1.937–1 and 1.881–

5T(f)(4)) are adopted as amended by this 

Treasury decision, and the 

corresponding temporary regulations are 

removed. The revisions are discussed 

below. The remainder of the proposed 

and temporary regulations, relating to 

source and effectively connected 

income with respect to U.S. possessions, 

will be finalized together with the other 

conforming changes in a forthcoming 

Treasury decision. 

Explanation of Provisions and 

Summary of Comments 

The proposed and temporary 

regulations under Code section 937(a) 

provide rules for determining whether 

an individual is a ‘‘bona fide resident’’

of a U.S. possession. Generally, § 1.937–

1T provides that an individual is a bona 

fide resident of a possession if the 

individual meets a presence test, a tax 

home test and a closer connection test. 

The IRS received comments relating to 

each of the three tests. 

I. Presence Test 

A. General Rule 

Under section 937(a)(1), in order to 

satisfy the presence test, a person must 

be present in the possession for at least 

183 days during the taxable year (the 

183-day rule). The proposed and 

temporary regulations provide several 

alternatives to the 183-day rule for 

purposes of satisfying the presence test. 

Thus, an individual who does not 

satisfy the 183-day rule nevertheless 

meets the presence test under the 

proposed and temporary regulations if 

the individual spends no more than 90 


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days in the United States during the 

taxable year; the individual spends 

more days in the possession than in the 

United States and has no earned income 

in the United States; or the individual 

has no permanent connection to the 

United States. 

The proposed and temporary 

regulations also provide a special rule 

for nonresident aliens in lieu of the 183- 

day rule and its alternatives. This 

special rule reflects the intention of the 

IRS and Treasury to adopt, to the extent 

possible, the generally applicable rules 

of residence with respect to nonresident 

aliens. Thus, the special rule requires 

nonresident aliens to satisfy a mirrored 

version of the substantial presence test 

of section 7701(b) in order to meet the 

presence test of section 937(a)(1). 

A number of commentators suggested 

that the IRS and Treasury should also 

allow U.S. citizens and residents to 

satisfy the 183-day rule of section 

937(a)(1) by satisfying a mirrored 

version of the substantial presence test 

of section 7701(b). These comments 

generally argued that the 183-day rule 

fails to provide the flexibility necessary 

to reflect the realities of island life. The 

comments also stated that the proposed 

and temporary regulations subject U.S. 

citizens and residents to a higher 

presence requirement than nonresident 

aliens. 

The final regulations do not 

incorporate the rules of section 7701(b) 

as an alternative to the 183-day rule of 

section 937(a)(1) for U.S. citizens and 

residents. Congress considered but 

specifically rejected adopting section 

7701(b) as the general rule for 

determining residency in a possession. 

See H.R. Conf. Rep. No. 108–755, at 

791–795 (2004). Instead, Congress 

adopted the 183-day rule and gave the 

Service authority to adopt appropriate 

exceptions to the rule to provide 

sufficient flexibility. The proposed and 

temporary regulations follow that 

approach and provide alternatives to the 

183-day rule intended to address the 

necessity of off-island travel. The IRS 

and Treasury do not believe it is 

appropriate to adopt a section 7701(b) 

rule by regulations when Congress 

expressly rejected this view. 

Accordingly, the IRS and Treasury 

generally retain the approach of the 

proposed and temporary regulations in 

the final regulations but also provide 

additional flexibility in the application 

of the 183-day rule and its alternatives 

to meet the needs of island residents 

and offset differences between the rules 

applicable to U.S. citizens and residents 

and the rules applicable to nonresident 

aliens. 

Commentators also suggested that the 

183-day rule should serve as a safe 

harbor whereby individuals who were 

present in the possession for at least 183 

days would not need also to satisfy the 

tax home and closer connection tests. 

The IRS and Treasury believe that this 

type of safe-harbor rule is inconsistent 

with the three-part test provided by 

Congress under section 937(a), which 

requires individuals to pass an objective 

presence test as well as the more 

subjective tax home and closer 

connection tests. In addition, the IRS 

and Treasury believe that applying the 

presence test in combination with the 

tax and closer connection tests is the 

most reliable method of determining 

whether an individual is a bona fide 

resident of a possession. 

B. Counting Days of Presence 

A number of commentators suggested 

that certain days an individual is not 

physically present in the possession 

nevertheless should be considered days 

during which the individual is present 

in the possession. Specifically, 

commentators suggested that days spent 

outside of the possession for medical 

treatment of the individual or a family 

member or because of a natural disaster 

in the possession, a family emergency, 

charitable pursuits, or business travel 

should be counted as days of presence 

in the possession for purposes of 

applying the 183-day rule. Similarly, 

commentators suggested that days spent 

in the United States for such purposes 

should not count as days spent in the 

United States under the alternatives to 

the 183-day rule. 

In response to these comments, the 

final regulations liberalize the rules on 

counting days of presence. Consistent 

with the legislative history of section 

937(a), the IRS and Treasury believe that 

it is desirable to allow for situations in 

which an individual’s presence outside 

the possession is unlikely to be 

attributable to a tax avoidance purpose. 

See H.R. Conf. Rep. No. 108–755, at 

791–795 (2004). Accordingly, the final 

regulations provide additional 

flexibility for certain situations 

involving medical conditions and 

natural disasters. 

The proposed and temporary 

regulations provide that any day that an 

individual is prevented from leaving the 

United States because of a medical 

condition that arose while the 

individual was present in the United 

States is not treated as a day of presence 

in the United States for purposes of the 

alternatives to the 183-day rule. In 

response to the comments received, the 

final regulations provide additional 

flexibility for medical treatment. Under 

the final regulations, a temporary stay in 

the United States for certain 

documented medical treatment of the 

individual, or a parent, spouse or child 

whom the individual accompanies to 

the treatment, will not count as days 

spent in the United States for purposes 

of the alternatives to the 183-day rule, 

irrespective of where the medical 

condition arose. Further, such a 

temporary stay outside of the 

possession, whether in the United 

States, another possession or a foreign 

country, also will count as days of 

presence in the possession. Qualifying 

medical treatment generally involves 

any period of inpatient care in a 

hospital or hospice in the United States, 

and any temporary period of time spent 

in the United States for medically 

necessary inpatient care in a residential 

medical care facility. The final 

regulations focus on the place of 

treatment and the formal credentials of 

the health care provider as an objective 

proxy for a determination that a medical 

condition is serious enough to entail 

periods of treatment that may not be 

readily covered by other alternatives to 

the 183-day rule. 

With respect to disasters, the final 

regulations provide that if an individual 

leaves, or is unable to return to, a 

relevant possession during (1) a twoweek period within which an officially 

declared major disaster in the relevant 

possession occurs, or (2) the period in 

which a mandatory evacuation order 

applies, then the individual will not 

count any day during either period as a 

day of presence in the United States, 

even though the individual has 

evacuated to or is otherwise present in 

the United States. The Federal 

Emergency Management Agency lists 

officially declared major disasters on its 

Web site at http://www.fema.gov/news/ 

disasters.fema. Furthermore, the 

individual may count that day (whether 

the individual’s temporary presence was 

in the United States or in some other 

location outside the relevant possession) 

as a day of presence in the relevant 

possession even though the major 

disaster or mandatory evacuation order 

prevented the individual from being 

physically present in the relevant 

possession. 

The final regulations do not adopt 

commentators’ suggestion that days 

spent outside of a possession for 

nonmedical family emergencies, 

charitable pursuits or business travel 

should count as days spent in the 

possession and outside the United 

States. These additional exceptions 

would have been administratively 

difficult to implement and monitor. The 

IRS and Treasury believe that in these 


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situations, and in medical situations not 

otherwise provided for in the final 

regulations, the 183-day rule in 

combination with the alternatives to 

that rule, as liberalized in these final 

regulations, provide sufficient flexibility 

to accommodate absences from the 

possession to pursue a range of 

activities. 

C. Permanent Connection 

Under the proposed and temporary 

regulations, an individual may satisfy 

the presence test if the individual has 

‘‘no permanent connection’’ to the 

United States during the taxable year. 

The proposed and temporary 

regulations provide a nonexclusive list 

of three items each of which constitutes 

a permanent connection. The 

enumerated items are a ‘‘permanent 

home’’ in the United States, a spouse or 

dependent having a principal place of 

abode in the United States, and current 

registration to vote in any political 

subdivision of the United States. 

The IRS and Treasury believe that the 

term significant connection is more 

precise and accurate than the term 

permanent connection. As a result, the 

final regulations use the term significant 

connection rather than permanent 

connection. In addition, the IRS and 

Treasury have concluded that the rules 

of the proposed and temporary 

regulations should be amended in 

several respects. 

The IRS and Treasury believe that it 

is not appropriate for the listing of items 

constituting a significant connection to 

be a nonexclusive list that leaves open 

the possibility that undefined or 

unspecified factors could result in a 

determination that an individual has a 

significant connection to the United 

States in a particular case. The 

significant connection test is an 

alternative under the presence test, 

which itself is fundamentally an 

objective standard. Section 937(a) and 

the regulations already provide a more 

subjective, facts-and-circumstances 

standard in the form of the closer 

connection test. With respect to the 

significant connection test, the IRS and 

Treasury believe that the regulations 

should provide certainty and that the 

three items enumerated in the proposed 

and temporary regulations are the 

critical significant connections. 

Accordingly, the final regulations adopt 

these items as the exclusive list of 

significant connections to the United 

States. 

The proposed and temporary 

regulations define permanent home by 

general reference to § 301.7701(b)–

2(d)(2). Commentators asserted that this 

definition does not provide adequate 

guidance as to the application of the 

significant connection test in the 

common situation of individuals who 

own several homes, including vacation 

homes. In response to these comments, 

the final regulations provide an 

exception for rental property. 

With respect to a spouse or dependent 

whose principal place of abode is in the 

United States, commentators requested 

that an estranged spouse and a child of 

a noncustodial parent not be treated as 

a significant connection. These 

commentators observed that the 

noncustodial parent may not have any 

control over the place where the child 

resides and that a finding of significant 

connection in such circumstances 

would be inappropriate. The IRS and 

Treasury agree, and the final regulations 

exclude such children from the 

definition of significant connection. In 

addition, the final regulations provide 

that only minor children are the type of 

dependent that constitutes a significant 

connection. Further, the final 

regulations do not treat as a significant 

connection a minor child who resides in 

the United States as a student, or a 

spouse from whom the individual is 

legally separated. 

D. Earned Income 

The proposed and temporary 

regulations provide that an individual 

may satisfy the presence test if the 

individual spends more days in the 

possession than in the United States and 

has no earned income in the United 

States. Commentators suggested that the 

regulations should permit an individual 

to qualify under this alternative even 

with some de minimis amount of earned 

income in the United States. In 

addition, commentators suggested that 

income earned on any day excluded for 

purposes of counting days of presence 

in the United States under the presence 

test (for example, for certain medical 

treatment) should be excluded from 

earned income. 

The IRS and Treasury agree that from 

the standpoint of practicality, fairness 

and administrability, de minimis 

amounts of U.S.-earned income should 

not render unavailable this alternative 

to the 183-day rule. In establishing a 

permitted amount of earned income for 

this purpose, the IRS and Treasury 

believe it appropriate to look to existing 

de minimis provisions of the Code 

involving compensation for services. In 

this regard, the final regulations crossreference the maximum amount ($3,000 

under current law) of compensation for 

labor or personal services performed in 

the United States that is not deemed to 

be income from sources within the 

United States under section 861(a)(3). 

The final regulations do not incorporate 

the suggestion that income earned on 

days excluded for purposes of counting 

days of presence should be excluded 

from earned income. The IRS and 

Treasury believe that this type of 

exclusion from earned income would be 

difficult to administer and could lead to 

abuse of this alternative, particularly 

given the additional flexibility provided 

in the final regulations with respect to 

days that can be excluded for purposes 

of counting days of presence. 

Commentators also suggested that the 

no-U.S.-earned-income alternative to the 

183-day rule should be applied by 

treating each state or other defined 

geographic area as a separate location so 

that the United States is not treated as 

a single location for purposes of 

determining if an individual was 

present for more days in the possession 

than in the United States under this 

alternative. The IRS and Treasury 

believe that this type of rule could be 

easily manipulated and difficult to 

administer. Further, with respect to 

residency determinations, the Code 

typically treats the United States as a 

single location. Therefore, the final 

regulations do not adopt this suggestion. 

II. Tax Home Test 

Sections 931, 932, 933 and 935 

generally apply to an individual who is 

considered a bona fide resident of the 

respective possession under Code 

section 937(a) for the entire taxable year. 

The proposed and temporary 

regulations treat an individual as a bona 

fide resident of a possession for the 

entire taxable year only if the individual 

satisfies the presence, tax home, and 

closer connection tests for the taxable 

year. 

Commentators suggested that it may 

be difficult for an individual moving to 

a possession during a taxable year to 

satisfy the tax home test if the 

individual had a regular or principal 

place of business in the United States or 

a closer connection to the United States 

for the portion of the year prior to the 

date of the move to the possession. 

These commentators suggested that 

individuals should be able to prorate 

their income for the taxable year of the 

move in accordance with the portion of 

the year for which they satisfy the tax 

home test. 

The IRS and Treasury agree that 

special rules are appropriate for the year 

of a move to a possession and believe 

that similar rules are appropriate for the 

year of a move out of a possession. 

However, the IRS and Treasury do not 

believe that general statutory authority 

exists for the proration of a taxpayer’s 

income for the taxable year in this 


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context. Only in the case of Puerto Rico 

does the Code expressly allow for 

prorating income according to periods 

of residency, and then only when an 

individual moves out of Puerto Rico. 

See section 933(2). Sections 931, 932 

and 935 contain no analogous proration 

provisions. As a result, except for a 

special rule applicable to certain 

individuals who move from Puerto Rico, 

the final regulations do not provide 

proration rules. 

Instead, the final regulations adopt a 

standard whereby an individual moving 

to a possession during the taxable year 

generally will satisfy the tax home test 

if the individual does not have a tax 

home outside that possession during 

any part of the last 183 days of that 

taxable year. To prevent abuse of this 

special rule, the regulations further 

require in order to use the rule that the 

individual not have been a bona fide 

resident of the relevant possession 

during the three taxable years before the 

move and that the individual continue 

to qualify as a bona fide resident of the 

possession for the three taxable years 

following the year of the move. 

Corresponding rules will apply to the 

taxable year in which an individual 

moves from a possession. However, 

reflecting that section 933(2) provides 

for proration of a U.S. citizen’s income 

with respect to bona fide residents who 

move from Puerto Rico, the final 

regulations provide a special rule that 

allows qualifying individuals to be 

treated as bona fide residents for the 

part of the year before they move from 

Puerto Rico. 

Under the tax home test, the proposed 

and temporary regulations provide a 

special rule applicable to seafarers. The 

special rule prevents an individual from 

being considered to have a tax home 

outside a particular possession solely by 

reason of employment on a ship or other 

seafaring vessel that is used 

predominantly in local and 

international waters. As set forth in the 

proposed and temporary regulations, the 

special rule does not specify how to 

treat time that the ship spends in waters 

of another possession. The final 

regulations clarify that time spent in the 

waters of another possession is treated 

the same as time spent in the waters of 

the United States or a foreign country. 

Thus, under the final regulations, a ship 

is considered to be used predominantly 

in local or international waters if the 

total time it is used in local and 

international waters during a taxable 

year exceeds the total time it is used in 

the territorial waters of the United 

States, another possession, and any 

foreign country. 

See section V of this preamble for an 

explanation of the transition rule 

concerning the effective date of the tax 

home test. 

III. Closer Connection Test 

Under section 937(a)(2), in order to be 

a bona fide resident of a possession, a 

person must not have a closer 

connection (determined under the 

principles of section 7701(b)(3)(B)(ii)) to 

the United States or a foreign country 

than to the relevant possession. The 

regulations under section 

7701(b)(3)(B)(ii) provide a facts-andcircumstances test to determine whether 

an individual has a closer connection 

with the United States or with a foreign 

country. This facts-and-circumstances 

test provides a nonexclusive list of 

factors to be taken into consideration. 

See § 301.7701(b)–2(d). The proposed 

and temporary regulations under section 

937 apply the principles of and factors 

provided in § 301.7701(b)–2(d) in 

determining whether an individual 

meets the closer connection test of 

section 937. 

Commentators suggested that the final 

regulations designate certain factors as 

primary and others as secondary, 

thereby indicating the relative weight of 

the factors listed in § 301.7701(b)–2(d). 

Alternatively, commentators requested 

that the final regulations indicate that 

an individual who meets a majority of 

factors establishes a closer connection. 

Some commentators criticized Example 

6 under § 1.937–1T(f) (the closer 

connection example) for failing to take 

into account all factors listed in 

§ 301.7701(b)–2(d) and for not providing 

an analysis of how the example 

concludes that the individual fails to 

satisfy the closer connection test. These 

commentators appeared to believe that 

the closer connection example suggests 

that the location of an individual’s 

spouse and children is more important 

than other factors or even is 

determinative of whether the individual 

has a closer connection to the United 

States or the possession. Some 

commentators also seemed to confuse 

these factors with the permanent 

connection alternative to the presence 

test and believed that the closer 

connection test requires an individual’s 

spouse and dependent children also to 

reside in the possession. Commentators 

noted that if it applied, this requirement 

would apparently conflict with the joint 

filing rule of section 932(d). 

The closer connection test is a factsand-circumstances test. The very nature 

of the test does not allow for weighting 

of factors because a factor with respect 

to one set of facts and circumstances 

may be less important than with respect 

to another set of facts and 

circumstances. Because the test must be 

applied to a wide variety of individual 

situations, the final regulations do not 

designate specific factors as primary, 

adopt a weighting of factors, or adopt a 

rule that counts a majority of the factors 

to determine closer connection. Further, 

because the list in § 301.7701(b)–2(d) is 

not exclusive, other factors, including, 

for example, whether the individual was 

born and raised in the relevant 

possession, may be considered in the 

determination. The final regulations 

amend Example 6 to demonstrate that 

all factors (including any factors 

important in a particular case but not on 

the nonexclusive list) must be 

considered in determining an 

individual’s closer connection. 

Although the location of the 

individual’s family is often a very 

important factor, it is one of many 

factors to be evaluated qualitatively 

under the facts-and-circumstances test, 

and in a particular case it may not be 

an important or overriding factor. Thus, 

unlike the no-significant-connection 

alternative (previously the nopermanent-connection alternative) to 

the presence test, the closer connection 

test can be satisfied, depending on an 

individual’s particular facts and 

circumstances, even if, for example, the 

individual’s spouse resides in the 

United States. In addition, Congress 

provided in section 937(a) that 

individuals must satisfy the closer 

connection test to establish bona fide 

residency in a possession 

notwithstanding the statutory joint 

filing rule provided in section 932(d). 

For these reasons, the regulations under 

section 937 do not conflict with section 

932(d). 

The proposed and temporary 

regulations require that an individual 

satisfy the closer connection test for the 

entire taxable year in order to be 

considered a bona fide resident of a 

relevant possession. Commentators 

noted that, as with the tax home test, it 

may be difficult for an individual 

moving into a possession during a 

taxable year to satisfy the closer 

connection test for the entire taxable 

year. Accordingly, the final regulations 

provide special year-of-move rules 

under the closer connection test similar 

to those described in section II of this 

preamble (relating to the tax home test). 

The final regulations make clarifying 

amendments to the closer connection 

test. Section 1.937–1T(e)(2) of the 

proposed and temporary regulations 

specifies that another possession is not 

considered a foreign country for 

purposes of the closer connection test. 

The final regulations do not specify this 


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5000 Federal Register / Vol. 71, No. 20 / Tuesday, January 31, 2006 / Rules and Regulations 

because a special rule distinguishing 

possessions from foreign countries is 

unnecessary and potentially confusing. 

In the absence of an explicit provision, 

possessions are not treated as foreign 

countries under the Code or Treasury 

Regulations. The final regulations also 

clarify that an individual’s connections 

to the United States and foreign 

countries are considered in the 

aggregate, rather than on a country-bycountry basis, when comparing those 

connections with the individual’s 

connections to the relevant possession. 

See section V of this preamble for an 

explanation of the transition rule 

concerning the effective date of the 

closer connection test. 

IV. Withholding Tax Exceptions for 

Certain Possessions Corporations 

Section 881(b) provides exemptions 

from, or reductions of, withholding tax 

and branch profits tax on certain U.S.- 

source income received by corporations 

organized in U.S. possessions. As one of 

the conditions for such treatment in 

certain cases, section 881(b)(1)(C) sets 

forth a ‘‘base-erosion’’ test requiring that 

no substantial part of the possessions 

corporation’s income be used to satisfy 

obligations to ‘‘persons’’ who are not 

bona fide residents of such a possession 

or of the United States. Section 937(a) 

provides in relevant part that for 

purposes of section 881(b), except as 

provided in regulations, a ‘‘person’’ is a 

bona fide resident if the person satisfies 

the requirements of section 937(a). For 

purposes of the base-erosion test, 

§ 1.881–5T(f)(4)(i) defines a bona fide 

resident of a possession by reference to 

§ 1.937–1T, which provides that only a 

natural person, rather than a juridical 

person, may qualify as a bona fide 

resident of a possession. Similarly, 

§ 1.881–5T(f)(4)(ii) defines bona fide 

residents of the United States for 

purposes of the base-erosion test as 

including only certain individuals who 

are citizens or residents of the United 

States. 

Commentators observed that the 

interaction of these rules in the 

proposed and temporary regulations 

could result in disqualifying income 

from the withholding tax exceptions in 

any situation where the possessions 

corporation makes payments to satisfy 

obligations to persons other than 

individuals. These commentators 

further noted that many common 

business arrangements would run afoul 

of the base-erosion test if corporations 

cannot constitute bona fide residents. 

The IRS and Treasury agree that such 

results would be undesirable and 

unintended. In the context of section 

881(b), the IRS and Treasury believe 

that the statutory terms persons and 

bona fide residents should not be 

interpreted as limited to individuals. 

Accordingly, the final regulations 

additionally provide that a corporation, 

or a business association that is treated 

as a corporation for tax purposes, may 

qualify as a bona fide resident of a 

relevant possession or the United States 

for purposes of the base-erosion test if 

it is created or organized in that 

jurisdiction. The final regulations reflect 

that section 937(a) and the regulations 

under that section are intended to apply 

only to individuals in determining 

whether a person is a bona fide resident 

of a possession within the meaning of 

section 881(b)(1)(C). 

Note that the IRS and Treasury 

believe that the words ‘‘direct or 

indirect’’ in section 881(b)(1)(C) (and 

§ 1.881–5(c)(3)) would authorize an antiabuse rule that prohibits payments to 

possessions corporations that are a part 

of back-to-back loan arrangements or 

other base erosion schemes. 

Accordingly, the IRS and Treasury are 

strongly considering including such an 

anti-abuse rule when finalizing the 

remaining proposed and temporary 

regulations under section 881(b). It is 

expected that any such anti-abuse rule 

would be retroactive to January 31, 

2006. 

Commentators also proposed that the 

final regulations adopt a special rule 

whereby publicly traded corporations 

may qualify for favorable tax treatment 

without regard to the conditions under 

section 881(b)(1), including the baseerosion test. A similar rule is provided 

under section 884(e)(4)(B) and § 1.884–

5(d) under the branch profits tax. 

However, the final regulations do not 

adopt such a special rule in this context. 

The IRS and Treasury note that section 

881(b) does not grant authority to depart 

from the statutory conditions of section 

881(b)(1), including the base-erosion 

test. 

V. Effective Date 

The proposed and temporary 

regulations are generally effective for tax 

years ending after October 22, 2004. 

Consistent with the effective date of 

section 937(a), the proposed and 

temporary regulations provide a 

transition rule that delays the effective 

date of the presence test until tax years 

beginning after October 22, 2004 (tax 

year 2005 for calendar year taxpayers). 

A number of commentators suggested 

that the final regulations should provide 

a similar transition rule with respect to 

the effective date of the tax home and 

closer connection tests so that the priorlaw, facts-and-circumstances test 

continues to apply through tax years 

beginning on or before October 22, 2004. 

The IRS and Treasury believe that it 

is appropriate to provide a transition 

rule with respect to the tax home and 

closer connection tests consistent with 

the effective date of the presence test. 

The effective date of the final 

regulations reflects the fact that most 

taxpayers already will have filed their 

income tax returns for taxable year 

2004. As a result, this transition rule is 

elective so that taxpayers may apply at 

their option the prior-law test for 

determining residency. 

Under section 937(a), an individual’s 

tax home outside the relevant 

possession conclusively forecloses bona 

fide residency in the possession, rather 

than being one of a number of facts and 

circumstances that are considered under 

the prior-law test. However, in most 

instances the outcome of the residency 

determination under prior law should 

be the same as with the application of 

the section 937(a) tax home and closer 

connection tests because individuals are 

required to demonstrate similar factors 

to support claims that they are bona fide 

residents of a particular possession. See, 

e.g., Sochurek v. Commissioner, 300 

F.2d 34, 38 (7th Cir. 1962) (enumerating 

representative factors), and Bergersen v. 

Commissioner, 109 F.3d 56, 61–62 (1st 

Cir. 1997), aff’g T.C. Memo 1995–424 

(applying prior-law facts-andcircumstances test in same way closer 

connection test is applied by ‘‘taking 

account of all of the [taxpayers’] ties to 

both places’’ to determine residency 

under principles of §§ 1.871–2 through 

1.871–5). The optional effective date for 

the tax home and closer connection tests 

is intended to create symmetry with the 

effective date of the presence test. No 

inference is intended or may be drawn 

from this transition rule as to the result 

under prior law. 

VI. Miscellaneous Changes 

Consistent with section 937(a), the 

final regulations specify that the 

residency rules apply for purposes of 

the income tax and certain other 

enumerated provisions of the Code. 

With respect to the estate and gift taxes, 

see §§ 20.2209–1 and 25.2501–1(d). 

The final regulations also reflect 

various nonsubstantive stylistic edits to 

the proposed and temporary regulations 

to enhance clarity and readability. 

VII. Mutual Agreement Procedures 

In the application of the operative 

provisions of the Code relating to 

possessions, for example sections 931 

through 935, section 937(a) and the final 

regulations govern whether an 

individual is a bona fide resident of a 


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particular possession. A commentator 

observed that there is a possibility that 

the IRS and the taxing authority of a 

particular possession might reach 

different conclusions with respect to 

certain determinations, including 

residency, when administering their 

respective income tax laws. In such 

cases, taxpayers are advised that mutual 

agreement procedures are available. For 

procedures to request the assistance of 

the IRS when a taxpayer is or may be 

subject to inconsistent tax treatment by 

the IRS and a possession tax agency, see 

Revenue Procedure 89–8 (1989–1 C.B. 

778). 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

also has been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations. Because the 

regulations do not impose a collection 

of information on small entities, the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6) does not apply. Pursuant to 

section 7805(f) of the Code, the notice 

of proposed rulemaking preceding these 

regulations was submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Drafting Information 

The principal author of these 

regulations is J. David Varley, Office of 

the Associate Chief Counsel 

(International), IRS. However, other 

personnel from the IRS and Treasury 

Department participated in their 

development. 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 602 

Reporting and recordkeeping 

requirements. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR parts 1 and 602 

are amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding entries 

in numerical order to read, in part, as 

follows: 

Authority: 26 U.S.C. 7805 * * *. 

Section 1.931–1T also issued under 26 

U.S.C. 7654(e). 

Section 1.932–1T also issued under 26 

U.S.C. 7654(e). 

Section 1.935–1T also issued under 26 

U.S.C. 7654(e). * * * 

Section 1.937–1 also issued under 26 

U.S.C. 937(a). * * * 

■ Par. 2. Section 1.881–5 is added to 

read as follows: 

§ 1.881–5 Exception for certain 

possessions corporations. 

(a) through (f)(3) [Reserved]. For more 

information, see § 1.881–5T(a) through 

(f)(3). 

(f)(4) Bona fide resident—

(i) With respect to a particular 

possession, means—

(A) An individual who is a bona fide 

resident of the possession as defined in 

§ 1.937–1; or 

(B) A business entity organized under 

the laws of the possession and taxable 

as a corporation in the possession; and 

(ii) With respect to the United States, 

means—

(A) An individual who is a citizen or 

resident of the United States (as defined 

under section 7701(b)(1)(A)); or 

(B) A business entity organized under 

the laws of the United States or any 

State that is classified as a corporation 

for Federal tax purposes under 

§ 301.7701–2(b) of this chapter. 

(5) through (7) [Reserved]. For more 

information, see § 1.881–5T(f)(5) 

through (7). 

(8) Effective date. This section applies 

to payments made after January 31, 

2006. However, taxpayers may choose to 

apply this section to all payments made 

after October 22, 2004 for which the 

statute of limitations under section 6511 

is open. 

(g) through (i) [Reserved]. For more 

information, see § 1.881–5T(g) through 

(i). 

■ Par. 3. In § 1.881–5T, paragraph (f)(4) 

is revised to read as follows: 

§ 1.881–5T Exception for certain 

possessions corporations (temporary). 

* * * * * 

(f)(4) [Reserved]. For more 

information, see § 1.881–5(f)(4). 

* * * * * 

§ 1.931–1T [Amended] 

■ Par. 4. In § 1.931–1T, paragraph (a)(2) 

is amended by removing and reserving 

the example. 

§ 1.932–1T [Amended] 

■ Par. 5. In § 1.932–1T, paragraph (i) is 

amended by removing and reserving 

example 2. 

§ 1.933–1T [Amended] 

■ Par. 6. In § 1.933–1T, paragraph (a)(2) 

is amended by removing and reserving 

the example. 

§ 1.935–1T [Amended] 

■ Par. 7. In § 1.935–1T, paragraph (f) is 

amended by removing and reserving 

examples 1 and 2. 

■ Par. 8. Section 1.937–1 is added to 

read as follows: 

§ 1.937–1 Bona fide residency in a 

possession. 

(a) Scope—(1) In general. Section 

937(a) and this section set forth the 

rules for determining whether an 

individual qualifies as a bona fide 

resident of a particular possession (the 

relevant possession) for purposes of 

subpart D, part III, Subchapter N, 

Chapter 1 of the Internal Revenue Code 

as well as section 865(g)(3), section 876, 

section 881(b), paragraphs (2) and (3) of 

section 901(b), section 957(c), section 

3401(a)(8)(C), and section 7654(a). 

(2) Definitions. For purposes of this 

section and §§ 1.937–2 and 1.937–3—

(i) Possession means one of the 

following United States possessions: 

American Samoa, Guam, the Northern 

Mariana Islands, Puerto Rico, or the 

Virgin Islands. When used in a 

geographical sense, the term comprises 

only the territory of each such 

possession (without application of 

sections 932(c)(3) and 935(c)(2) (as in 

effect before the effective date of its 

repeal)). 

(ii) United States, when used in a 

geographical sense, is defined in section 

7701(a)(9), and without application of 

sections 932(a)(3) and 935(c)(1) (as in 

effect before the effective date of its 

repeal). 

(b) Bona fide resident—(1) General 

rule. An individual qualifies as a bona 

fide resident of the relevant possession 

if such individual satisfies the 

requirements of paragraphs (c) through 

(e) of this section with respect to such 

possession. 

(2) Special rule for members of the 

Armed Forces. A member of the Armed 

Forces of the United States who 

qualified as a bona fide resident of the 

relevant possession in a prior taxable 

year is deemed to have satisfied the 

requirements of paragraphs (c) through 

(e) of this section for a subsequent 

taxable year if such individual 

otherwise is unable to satisfy such 

requirements by reason of being absent 

from such possession or present in the 

United States during such year solely in 

compliance with military orders. 

Conversely, a member of the Armed 

Forces of the United States who did not 


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5002 Federal Register / Vol. 71, No. 20 / Tuesday, January 31, 2006 / Rules and Regulations 

qualify as a bona fide resident of the 

relevant possession in a prior taxable 

year is not considered to have satisfied 

the requirements of paragraphs (c) 

through (e) of this section for a 

subsequent taxable year by reason of 

being present in such possession solely 

in compliance with military orders. 

Armed Forces of the United States is 

defined (and members of the Armed 

Forces are described) in section 

7701(a)(15). 

(3) Juridical persons. Except as 

provided in § 1.881–5(f): 

(i) Only natural persons may qualify 

as bona fide residents of a possession; 

and 

(ii) The rules governing the tax 

treatment of bona fide residents of a 

possession do not apply to juridical 

persons (including corporations, 

partnerships, trusts, and estates). 

(4) Transition rule. For taxable years 

beginning before October 23, 2004, and 

ending after October 22, 2004, an 

individual is considered to qualify as a 

bona fide resident of the relevant 

possession if that individual would be 

a bona fide resident of the relevant 

possession by applying the principles of 

§§ 1.871–2 through 1.871–5. 

(5) Special rule for cessation of bona 

fide residence in Puerto Rico. See 

paragraph (f)(2)(ii) of this section for a 

special rule applicable to a citizen of the 

United States who ceases to be a bona 

fide resident of Puerto Rico during a 

taxable year. 

(c) Presence test—(1) In general. A 

United States citizen or resident alien 

individual (as defined in section 

7701(b)(1)(A)) satisfies the requirements 

of this paragraph (c) for a taxable year 

if during that taxable year that 

individual—

(i) Was present in the relevant 

possession for at least 183 days; 

(ii) Was present in the United States 

for no more than 90 days; 

(iii) Had earned income (as defined in 

§ 1.911–3(b)) in the United States, if 

any, not exceeding in the aggregate the 

amount specified in section 861(a)(3)(B) 

and was present for more days in the 

relevant possession than in the United 

States; or 

(iv) Had no significant connection to 

the United States. See paragraph (c)(5) 

of this section. 

(2) Special rule for alien individuals. 

A nonresident alien individual (as 

defined in section 7701(b)(1)(B)) 

satisfies the requirements of this 

paragraph (c) for a taxable year if during 

that taxable year that individual satisfies 

the substantial presence test of 

§ 301.7701(b)–1(c) of this chapter 

(except for the substitution of the name 

of the relevant possession for the term 

United States where appropriate). 

(3) Days of presence. For purposes of 

paragraph (c)(1) of this section—

(i) An individual is considered to be 

present in the relevant possession on: 

(A) Any day that the individual is 

physically present in that possession at 

any time during the day; 

(B) Any day that an individual is 

outside of the relevant possession to 

receive, or to accompany on a full-time 

basis a parent, spouse, or child (as 

defined in section 152(f)(1)) who is 

receiving, qualifying medical treatment 

as defined in paragraph (c)(4) of this 

section; and 

(C) Any day that an individual is 

outside the relevant possession because 

the individual leaves or is unable to 

return to the relevant possession during 

any—

(1) 14-day period within which a 

major disaster occurs in the relevant 

possession for which a Federal 

Emergency Management Agency Notice 

of a Presidential declaration of a major 

disaster is issued in the Federal 

Register; or 

(2) Period for which a mandatory 

evacuation order is in effect for the 

geographic area in the relevant 

possession in which the individual’s 

place of abode is located. 

(ii) An individual is considered to be 

present in the United States on any day 

that the individual is physically present 

in the United States at any time during 

the day. Notwithstanding the preceding 

sentence, the following days will not 

count as days of presence in the United 

States: 

(A) Any day that an individual is 

temporarily present in the United States 

under circumstances described in 

paragraph (c)(3)(i)(B) or (C) of this 

section; 

(B) Any day that an individual is in 

transit between two points outside the 

United States (as described in 

§ 301.7701(b)–3(d) of this chapter), and 

is physically present in the United 

States for fewer than 24 hours; 

(C) Any day that an individual is 

temporarily present in the United States 

as a professional athlete to compete in 

a charitable sports event (as described in 

§ 301.7701(b)–3(b)(5) of this chapter); 

(D) Any day that an individual is 

temporarily present in the United States 

as a student (as defined in section 

152(f)(2)); and 

(E) In the case of an individual who 

is an elected representative of the 

relevant possession, or who serves full 

time as an elected or appointed official 

or employee of the government of the 

relevant possession (or any political 

subdivision thereof), any day spent 

serving the relevant possession in that 

role. 

(iii) If, during a single day, an 

individual is physically present—

(A) In the United States and in the 

relevant possession, that day is 

considered a day of presence in the 

relevant possession; 

(B) In two possessions, that day is 

considered a day of presence in the 

possession where the individual’s tax 

home is located (applying the rules of 

paragraph (d) of this section). 

(4) Qualifying medical treatment—(i) 

In general. The term qualifying medical 

treatment means medical treatment 

provided by (or under the supervision 

of) a physician (as defined in section 

213(d)(4)) for an illness, injury, 

impairment, or physical or mental 

condition that satisfies the 

documentation and production 

requirements of paragraph (c)(4)(iii) of 

this section and that involves—

(A) Any period of inpatient care in a 

hospital or hospice and any period 

immediately before or after that 

inpatient care to the extent it is 

medically necessary; or 

(B) Any temporary period of inpatient 

care in a residential medical care facility 

for medically necessary rehabilitation 

services; 

(ii) Inpatient care. The term inpatient 

care means care requiring an overnight 

stay in a hospital, hospice, or residential 

medical care facility, as the case may be. 

(iii) Documentation and production 

requirements. In order to satisfy the 

documentation and production 

requirements of this paragraph, an 

individual must, with respect to each 

qualifying medical treatment, prepare 

(or obtain), maintain, and, upon a 

request by the Commissioner (or the 

person responsible for tax 

administration in the relevant 

possession), make available within 30 

days of such request: 

(A) Records that provide—

(1) The patient’s name and 

relationship to the individual (if the 

medical treatment is provided to a 

person other than the individual); 

(2) The name and address of the 

hospital, hospice, or residential medical 

care facility where the medical 

treatment was provided; 

(3) The name, address, and telephone 

number of the physician who provided 

the medical treatment; 

(4) The date(s) on which the medical 

treatment was provided; and 

(5) Receipt(s) of payment for the 

medical treatment; 

(B) Signed certification by the 

providing or supervising physician that 

the medical treatment was qualified 

medical treatment within the meaning 


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of paragraph (c)(4)(i) of this section, and 

setting forth—

(1) The patient’s name; 

(2) A reasonably detailed description 

of the medical treatment provided by (or 

under the supervision of) the physician; 

(3) The dates on which the medical 

treatment was provided; and 

(4) The medical facts that support the 

physician’s certification and 

determination that the treatment was 

medically necessary; and 

(C) Such other information as the 

Commissioner may prescribe by notice, 

form, instructions, or other publication 

(see § 601.601(d)(2) of this chapter). 

(5) Significant connection. For 

purposes of paragraph (c)(1)(iv) of this 

section—

(i) The term significant connection to 

the United States means—

(A) A permanent home in the United 

States; 

(B) Current registration to vote in any 

political subdivision of the United 

States; or 

(C) A spouse or child (as defined in 

section 152(f)(1)) who has not attained 

the age of 18 whose principal place of 

abode is in the United States other 

than—

(1) A child who is in the United States 

because the child is living with a 

custodial parent under a custodial 

decree or multiple support agreement; 

or 

(2) A child who is in the United States 

as a student (as defined in section 

152(f)(2)). 

(ii) Permanent home—(A) General 

rule. For purposes of paragraph 

(c)(5)(i)(A) of this section, except as 

provided in paragraph (c)(5)(ii)(B) of 

this section, the term permanent home 

has the same meaning as in 

§ 301.7701(b)–2(d)(2) of this chapter. 

(B) Exception for rental property. If an 

individual or the individual’s spouse 

owns property and rents it to another 

person at any time during the taxable 

year, then notwithstanding that the 

rental property may constitute a 

permanent home under § 301.7701(b)–

2(d)(2) of this chapter, it is not a 

permanent home under this paragraph 

(c)(5)(ii) unless the taxpayer uses any 

portion of it as a residence during the 

taxable year under the principles of 

section 280A(d). In applying the 

principles of section 280A(d) for this 

purpose, an individual is treated as 

using the rental property for personal 

purposes on any day determined under 

the principles of section 280A(d)(2) or 

on any day that the rental property (or 

any portion of it) is not rented to 

another person at fair rental for the 

entire day. The rental property is not 

used for personal purposes on any day 

on which the principal purpose of the 

use of the rental property is to perform 

repair or maintenance work on the 

property. Whether the principal purpose 

of the use of the rental property is to 

perform repair or maintenance work is 

determined in light of all the facts and 

circumstances including, but not 

limited to, the following: The amount of 

time devoted to repair and maintenance 

work, the frequency of the use for repair 

and maintenance purposes during a 

taxable year, and the presence and 

activities of companions. 

(iii) For purposes of this paragraph 

(c)(5), the term spouse does not include 

a spouse from whom the individual is 

legally separated under a decree of 

divorce or separate maintenance. 

(d) Tax home test—(1) General rule. 

Except as provided in paragraph (d)(2) 

of this section, an individual satisfies 

the requirements of this paragraph (d) 

for a taxable year if that individual did 

not have a tax home outside the relevant 

possession during any part of the 

taxable year. For purposes of section 

937 and this section, an individual’s tax 

home is determined under the 

principles of section 911(d)(3) without 

regard to the second sentence thereof. 

Thus, under section 937, an individual’s 

tax home is considered to be located at 

the individual’s regular or principal (if 

more than one regular) place of 

business. If the individual has no 

regular or principal place of business 

because of the nature of the business, or 

because the individual is not engaged in 

carrying on any trade or business within 

the meaning of section 162(a), then the 

individual’s tax home is the individual’s 

regular place of abode in a real and 

substantial sense. 

(2) Exceptions—(i) Year of move. See 

paragraph (f) of this section for a special 

rule applicable to an individual who 

becomes or ceases to be a bona fide 

resident of the relevant possession 

during a taxable year. 

(ii) Special rule for seafarers. For 

purposes of section 937 and this section, 

an individual is not considered to have 

a tax home outside the relevant 

possession solely by reason of 

employment on a ship or other seafaring 

vessel that is predominantly used in 

local and international waters. For this 

purpose, a vessel is considered to be 

predominantly used in local and 

international waters if, during the 

taxable year, the aggregate amount of 

time it is used in international waters 

and in the waters within three miles of 

the relevant possession exceeds the 

aggregate amount of time it is used in 

the territorial waters of the United 

States, another possession, and a foreign 

country. 

(iii) Special rule for students and 

government officials. Any days 

described in paragraphs (c)(3)(ii)(D) and 

(E) of this section are disregarded for 

purposes of determining whether an 

individual has a tax home outside the 

relevant possession under paragraph 

(d)(1) of this section during any part of 

the taxable year. 

(e) Closer connection test—(1) General 

rule. Except as provided in paragraph 

(e)(2) of this section, an individual 

satisfies the requirements of this 

paragraph (e) for a taxable year if that 

individual did not have a closer 

connection to the United States or a 

foreign country than to the relevant 

possession during any part of the 

taxable year. For purposes of this 

paragraph (e)—

(i) The principles of section 

7701(b)(3)(B)(ii) and § 301.7701(b)–2(d) 

of this chapter apply (without regard to 

the final sentence of § 301.7701(b)–2(b) 

of this chapter); and 

(ii) An individual’s connections to the 

relevant possession are compared to the 

aggregate of the individual’s 

connections with the United States and 

foreign countries. 

(2) Exception for year of move. See 

paragraph (f) of this section for a special 

rule applicable to an individual who 

becomes or ceases to be a bona fide 

resident of the relevant possession 

during a taxable year. 

(f) Year of move—(1)Move to a 

possession. For the taxable year in 

which an individual’s residence 

changes to the relevant possession, the 

individual satisfies the requirements of 

paragraphs (d)(1) and (e)(1) of this 

section if—

(i) For each of the 3 taxable years 

immediately preceding the taxable year 

of the change of residence, the 

individual is not a bona fide resident of 

the relevant possession; 

(ii) For each of the last 183 days of the 

taxable year of the change of residence, 

the individual does not have a tax home 

outside the relevant possession or a 

closer connection to the United States or 

a foreign country than to the relevant 

possession; and 

(iii) For each of the 3 taxable years 

immediately following the taxable year 

of the change of residence, the 

individual is a bona fide resident of the 

relevant possession. 

(2) Move from a possession—(i) 

General rule. Except for a bona fide 

resident of Puerto Rico to whom 

§ 1.933–1(b) and paragraph (f)(2)(ii) of 

this section apply, for the taxable year 

in which an individual ceases to be a 

bona fide resident of the relevant 

possession, the individual satisfies the 


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5004 Federal Register / Vol. 71, No. 20 / Tuesday, January 31, 2006 / Rules and Regulations 

requirements of paragraphs (d)(1) and 

(e)(1) of this section if—

(A) For each of the 3 taxable years 

immediately preceding the taxable year 

of the change of residence, the 

individual is a bona fide resident of the 

relevant possession; 

(B) For each of the first 183 days of 

the taxable year of the change of 

residence, the individual does not have 

a tax home outside the relevant 

possession or a closer connection to the 

United States or a foreign country than 

to the relevant possession; and 

(C) For each of the 3 taxable years 

immediately following the taxable year 

of the change of residence, the 

individual is not a bona fide resident of 

the relevant possession. 

(ii) Year of move from Puerto Rico. 

Notwithstanding an individual’s failure 

to satisfy the presence, tax home, or 

closer connection test prescribed under 

paragraph (b)(1) of this section for the 

taxable year, the individual is a bona 

fide resident of Puerto Rico for that part 

of the taxable year described in 

paragraph (f)(2)(ii)(E) of this section if 

the individual—

(A) Is a citizen of the United States; 

(B) Is a bona fide resident of Puerto 

Rico for a period of at least 2 taxable 

years immediately preceding the taxable 

year; 

(C) Ceases to be a bona fide resident 

of Puerto Rico during the taxable year; 

(D) Ceases to have a tax home in 

Puerto Rico during the taxable year; and 

(E) Has a closer connection to Puerto 

Rico than to the United States or a 

foreign country throughout the part of 

the taxable year preceding the date on 

which the individual ceases to have a 

tax home in Puerto Rico. 

(g) Examples. The principles of this 

section are illustrated by the following 

examples: 

Example 1. Presence test. W, a U.S. citizen, 

lives for part of the taxable year in a 

condominium, which she owns, located in 

Possession P. W also owns a house in State 

N where she lives for 120 days every year to 

be near her grown children and 

grandchildren. W is retired and her income 

consists solely of pension payments, 

dividends, interest, and Social Security 

benefits. For 2006, W is only present in 

Possession P for a total of 175 days because 

of a 70-day vacation to Europe and Asia. 

Thus, for taxable year 2006, W is not present 

in Possession P for at least 183 days, is 

present in the United States for more than 90 

days, and has a significant connection to the 

United States by reason of her permanent 

home. However, under paragraph (c)(1)(iii) of 

this section, W still satisfies the presence test 

of paragraph (c) of this section with respect 

to Possession P because she has no earned 

income in the United States and is present 

for more days in Possession P than in the 

United States. 

Example 2. Presence test. T, a U.S. citizen, 

was born and raised in State A, where his 

mother still lives in the house in which T 

grew up. T is a sales representative for a 

company based in Possession V. T lives with 

his wife and minor children in their house 

in Possession V. T is registered to vote in 

Possession V and not in the United States. In 

2006, T spends 120 days in State A and 

another 120 days in foreign countries. When 

traveling on business to State A, T often stays 

at his mother’s house in the bedroom he used 

when he was a child. T’s stays are always of 

short duration, and T asks for his mother’s 

permission before visiting to make sure that 

no other guests are using the room and that 

she agrees to have him as a guest in her 

house at that time. Therefore, under 

paragraph (c)(5)(ii) of this section, T’s 

mother’s house is not a permanent home of 

T. Assuming that no other accommodations 

in the United States constitute a permanent 

home with respect to T, then under 

paragraphs (c)(1)(iv) and (c)(5) of this section, 

T has no significant connection to the United 

States. Accordingly, T satisfies the presence 

test of paragraph (c) of this section for taxable 

year 2006. 

Example 3. Alien resident of possession—

presence test. F is a citizen of Country G. F’s 

tax home is in Possession C and F has no 

closer connection to the United States or a 

foreign country than to Possession C. F is 

present in Possession C for 123 days and in 

the United States for 110 days every year. 

Accordingly, F is a nonresident alien with 

respect to the United States under section 

7701(b), and a bona fide resident of 

Possession C under paragraphs (b), (c)(2), (d), 

and (e) of this section. 

Example 4. Seafarers— tax home. S, a U.S. 

citizen, is employed by a fishery and spends 

250 days at sea on a fishing vessel in 2006. 

When not at sea, S resides with his wife at 

a house they own in Possession G. The 

fishing vessel upon which S works departs 

and arrives at various ports in Possession G, 

other possessions, and foreign countries, but 

is in international and local waters (within 

the meaning of paragraph (d)(2) of this 

section) for 225 days in 2006. Under 

paragraph (d)(2) of this section, for taxable 

year 2006, S will not be considered to have 

a tax home outside Possession G for purposes 

of section 937 and this section solely by 

reason of S’s employment on board the 

fishing vessel. 

Example 5. Seasonal workers—tax home 

and closer connection. P, a U.S. citizen, is a 

permanent employee of a hotel in Possession 

I, but works only during the tourist season. 

For the remainder of each year, P lives with 

her husband and children in Possession Q, 

where she has no outside employment. Most 

of P’s personal belongings, including her 

automobile, are located in Possession Q. P is 

registered to vote in, and has a driver’s 

license issued by, Possession Q. P does her 

personal banking in Possession Q and P 

routinely lists her address in Possession Q as 

her permanent address on forms and 

documents. P satisfies the presence test of 

paragraph (c) of this section with respect to 

both Possession Q and Possession I, because, 

among other reasons, under paragraph 

(c)(1)(ii) of this section she does not spend 

more than 90 days in the United States 

during the taxable year. P satisfies the tax 

home test of paragraph (d) of this section 

only with respect to Possession I, because her 

regular place of business is in Possession I. 

P satisfies the closer connection test of 

paragraph (e) of this section with respect to 

both Possession Q and Possession I, because 

she does not have a closer connection to the 

United States or to any foreign country (and 

possessions generally are not treated as 

foreign countries). Therefore, P is a bona fide 

resident of Possession I for purposes of the 

Internal Revenue Code. 

Example 6. Closer connection to United 

States than to possession. Z, a U.S. citizen, 

relocates to Possession V in a prior taxable 

year to start an investment consulting and 

venture capital business. Z’s wife and two 

teenage children remain in State C to allow 

the children to complete high school. Z 

travels back to the United States regularly to 

see his wife and children, to engage in 

business activities, and to take vacations. He 

has an apartment available for his full-time 

use in Possession V, but he remains a joint 

owner of the residence in State C where his 

wife and children reside. Z and his family 

have automobiles and personal belongings 

such as furniture, clothing, and jewelry 

located at both residences. Although Z is a 

member of the Possession V Chamber of 

Commerce, Z also belongs to and has current 

relationships with social, political, cultural, 

and religious organizations in State C. Z 

receives mail in State C, including brokerage 

statements, credit card bills, and bank 

advices. Z conducts his personal banking 

activities in State C. Z holds a State C driver’s 

license and is registered to vote in State C. 

Based on the totality of the particular facts 

and circumstances pertaining to Z, Z is not 

a bona fide resident of Possession V because 

he has a closer connection to the United 

States than to Possession V and therefore 

fails to satisfy the requirements of paragraphs 

(b)(1) and (e) of this section. 

Example 7. Year of move to possession. D, 

a U.S. citizen, files returns on a calendar year 

basis. From January 2003 through May 2006, 

D resides in State R. In June 2006, D moves 

to Possession N, purchases a house, and 

accepts a permanent position with a local 

employer. D’s principal place of business 

from July 1 through December 31, 2006 is in 

Possession N, and during that period (which 

totals at least 183 days) D does not have a 

closer connection to the United States or a 

foreign country than to Possession N. For the 

remainder of 2006, and throughout years 

2007 through 2009, D continues to live and 

work in Possession N and maintains a closer 

connection to Possession N than to the 

United States or any foreign country. D 

satisfies the tax home and closer connection 

tests for 2006 under paragraphs (d)(2), (e)(2), 

and (f)(1) of this section. Accordingly, 

assuming that D also satisfies the presence 

test in paragraph (c) of this section, D is a 

bona fide resident of Possession N for all of 

taxable year 2006. 

Example 8. Year of move from possession 

(other than Puerto Rico). J, a U.S. citizen, 

files returns on a calendar year basis. From 

January 2007 through December 2009, J is a 

bona fide resident of Possession C because 


hsrobinson on PROD1PC70 with RULES
Federal Register / Vol. 71, No. 20 / Tuesday, January 31, 2006 / Rules and Regulations 5005 

she satisfies the requirements of paragraph 

(b)(1) of this section for each year. J continues 

to reside in Possession C until September 6, 

2010, when she accepts new employment 

and moves to State H. J’s principal place of 

business from January 1 through September 

5, 2010 is in Possession C, and during that 

period (which totals at least 183 days) J does 

not have a closer connection to the United 

States or a foreign country than to Possession 

C. For the remainder of 2010 and throughout 

years 2011 through 2013, D continues to live 

and work in State H and is not a bona fide 

resident of Possession C. J satisfies the tax 

home and closer connection tests for 2010 

with respect to Possession C under 

paragraphs (d)(2)(i), (e)(2), and (f)(2)(i) of this 

section. Accordingly, assuming that J also 

satisfies the presence test of paragraph (c) of 

this section, J is a bona fide resident of 

Possession C for all of taxable year 2010. 

Example 9. Year of move from Puerto Rico. 

R, a U.S. citizen who files returns on a 

calendar year basis satisfies the requirements 

of paragraphs (b) through (e) of this section 

for years 2006 and 2007. From January 

through April 2008, R continues to reside 

and maintain his principal place of business 

in and closer connection to Puerto Rico. On 

May 5, 2008, R moves and changes his 

principal place of business (tax home) to 

State N and later that year establishes a closer 

connection to the United States than to 

Puerto Rico. R does not satisfy the presence 

test of paragraph (c) for 2008 with respect to 

Puerto Rico. Moreover, because R had a tax 

home outside of Puerto Rico and establishes 

a closer connection to the United States in 

2008, R does not satisfy the requirements of 

paragraph (d)(1) or (e)(1) of this section for 

2008. However, because R was a bona fide 

resident of Puerto Rico for at least two 

taxable years before his change of residence 

to State N in 2008, he is a bona fide resident 

of Puerto Rico from January 1 through May 

4, 2008 under paragraphs (b)(5) and (f)(2)(ii) 

of this section. See section 933(2) and 

§ 1.933–1(b) for rules on attribution of 

income. 

(h) Information reporting requirement. 

The following individuals are required 

to file notice of their new tax status in 

such time and manner as the 

Commissioner may prescribe by notice, 

form, instructions, or other publication 

(see § 601.601(d)(2) of this chapter): 

(1) Individuals who take the position 

for U.S. tax reporting purposes that they 

qualify as bona fide residents of a 

possession for a tax year subsequent to 

a tax year for which they were required 

to file Federal income tax returns as 

citizens or residents of the United States 

who did not so qualify. 

(2) Citizens and residents of the 

United States who take the position for 

U.S. tax reporting purposes that they do 

not qualify as bona fide residents of a 

possession for a tax year subsequent to 

a tax year for which they were required 

to file income tax returns (with the 

Internal Revenue Service, the tax 

authorities of a possession, or both) as 

individuals who did so qualify. 

(3) Bona fide residents of Puerto Rico 

or a section 931 possession (as defined 

in § 1.931–1T(c)(1)) who take a position 

for U.S. tax reporting purposes that they 

qualify as bona fide residents of that 

possession for a tax year subsequent to 

a tax year for which they were required 

to file income tax returns as bona fide 

residents of the United States Virgin 

Islands or a section 935 possession (as 

defined in § 1.935–1T(a)(3)(i)). 

(i) Effective date. Except as provided 

in this paragraph (i), this section applies 

to taxable years ending after January 31, 

2006. Paragraph (h) of this section also 

applies to a taxpayer’s 3 taxable years 

immediately preceding the taxpayer’s 

first taxable year ending after October 

22, 2004. Taxpayers also may choose to 

apply this section in its entirety to all 

taxable years ending after October 22, 

2004 for which the statute of limitations 

under section 6511 is open. 

§ 1.937–1T [Removed] 

■ Par. 9. Section 1.937–1T is removed. 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par. 10. The authority citation for part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

■ Par. 11. In § 602.101, paragraph (b) is 

amended by removing the entry for 

‘‘1.937–1T’’ and adding a new entry for 

‘‘1.937–1’’ in numerical order to the 

table to read as follows: 

§ 602.101 OMB Control numbers. 

* * * * * 

(b) * * * 

CFR part or section where 

identified and described 

Current OMB 

control No. 

* * * * * 

1.937–1 ................................. 1545–1930 

* * * * * 

Mark E. Matthews, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: January 20, 2006. 

Eric Solomon, 

Acting Deputy Assistant Secretary of the 

Treasury (Tax Policy). 

[FR Doc. 06–818 Filed 1–30–06; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE INTERIOR 

Office of Surface Mining Reclamation 

and Enforcement 

30 CFR Part 915 

[Docket No. IA–015–FOR] 

Iowa Regulatory Program 

AGENCY: Office of Surface Mining 

Reclamation and Enforcement, Interior. 

ACTION: Final rule; approval of 

amendment. 

SUMMARY: We, the Office of Surface 

Mining Reclamation and Enforcement 

(OSM), are approving an amendment to 

the Iowa regulatory program (Iowa 

program) under the Surface Mining 

Control and Reclamation Act of 1977 

(SMCRA or the Act). Iowa proposed to 

amend its rules regarding its small 

operator assistance program. Iowa 

intends to revise its program to be 

consistent with the corresponding 

Federal regulations and SMCRA. 

EFFECTIVE DATE: January 31, 2006. 

FOR FURTHER INFORMATION CONTACT: 

Andrew R. Gilmore, Chief, Alton Field 

Division. Telephone: (618) 463–6460. Email: IFOMAIL@osmre.gov. 

SUPPLEMENTARY INFORMATION: 

I. Background on the Iowa Program 

II. Submission of the Amendment 

III. OSM’s Findings 

IV. Summary and Disposition of Comments 

V. OSM’s Decision 

VI. Procedural Determinations 

I. Background on the Iowa Program 

Section 503(a) of the Act permits a 

State to assume primacy for the 

regulation of surface coal mining and 

reclamation operations on non-Federal 

and non-Indian lands within its borders 

by demonstrating that its State program 

includes, among other things, ‘‘a State 

law which provides for the regulation of 

surface coal mining and reclamation 

operations in accordance with the 

requirements of this Act * * *; and 

rules and regulations consistent with 

regulations issued by the Secretary 

pursuant to this Act.’’ See 30 U.S.C. 

1253(a)(1) and (7). On the basis of these 

criteria, the Secretary of the Interior 

conditionally approved the Iowa 

program effective April 10, 1981. You 

can find background information on the 

Iowa program, including the Secretary’s 

findings, the disposition of comments, 

and conditions of approval, in the 

January 21, 1981, Federal Register (46 

FR 5885). You can also find later actions 

concerning Iowa’s program and program 

amendments at 30 CFR 915.10, 915.15, 

and 915.16. 


hsrobinson on PROD1PC70 with RULES